It's mid-week madness in the ASX energy sector as an explosive development derails hopes of Australia's two largest oil and gas companies joining forces. Consequently, Santos Ltd (ASX: STO) shares are caught in today's damaging fallout.
The Santos share price is bucking the broader optimism among Australian shares in afternoon trading. Before publishing, the oil and gas titan shares were swapping hands at a wounded rate of $7.46, down 5.2% from its previous close. However, at their low, shares had lost a painful 8.6%.
The dismal performance — worst of all companies inside the S&P/ASX 200 Index (ASX: XJO) — descends from Woodside Energy Group Ltd's (ASX: WDS) verdict on combining with its smaller energy peer.
Sayonara to oil and gas mega-merger
Thirteen days ago, Santos noted it was "in early-stage discussions to evaluate the merits of a potential merger with Woodside." in its fourth-quarter report. However, those talks have now been concluded as Woodside Energy revealed discussions have ceased.
Before today, the Santos share price had rallied 15% after confirmed merger discussions on 7 December 2023.
Little detail is provided in Woodside's announcement as to how the verdict reached its uneventful conclusion. Rather than elaborating on the rationale, Woodside CEO Meg O'Neill plainly stated:
We continue to be disciplined in our approach to mergers and acquisitions and capital management to create and deliver value for shareholders. While the discussions with Santos did not result in a transaction, Woodside considers that the global LNG sector provides significant potential for value creation.
Furthermore, O'Neill noted that the company conducts thorough due diligence, only pursuing a transaction that creates value for shareholders. Inadvertently, this would suggest Woodside couldn't see the value in tying the knot with Santos.
Whether this decision was based on the price demanded by Santos, the synergises (or lack thereof), or a combination of the two, we won't know unless further details are shared.
Some industry experts were left scratching their heads when the merger talks were first confirmed. One possible pinch point highlighted was the price. Specifically, the difficulty in striking an offer that appeases Santos shareholders in light of its depressed price-to-earnings (P/E) ratio of around 9 times earnings.
Santos shares left in the lurch
The question now for holders of Santos shares is where to from here.
Investors valued the oil and gas company at $6.78 before merger talks were public knowledge. Now swapping hands at $7.49, there's plenty of space between the current share price and what it traded for before all of this started.
Uncertainty around whether another suitor will be pursued will hang about until Santos provides clarity.
Until then, the company's official results on 21 February will mark the next checkpoint for shareholders.
Woodside shares are up 1.4% to $32.73 at the time of writing.
